image source: Getty
FX rebalancing
Looking at rebalancing, it comes down to how fund and money managers try to realign their books or their portfolios at the end of a month or the end of a quarter. So, fund managers have a particular allocation in their portfolios that has specifically been selected to protect them from being either over-exposed or under-exposed on any given financial instrument or asset classes.
Most portfolio managers have a specific benchmark as part of their books or, let’s call it, a target in the particular currency exposure that they want in their portfolio. However, during the month, we know that the value of currencies and other financial instruments will change, and that’ll change throughout the month due to various factors. Hence, at the end of the month, that will need to realign or rebalance the currency exposures to ensure that they are over or underexposed on any given currencies, whether that is the US dollar or the common currency. Based on this function, many investment banks have created models to help them anticipate what type of rebalancing they can expect that should occur on the performance of currencies and equities, etc., during the month.
Please see the month-end rebalancing flows from different banks:
EA Growth
The OECD has been assessing how the post-COVID recovery will progress. They see that Global economic growth is now expected to be 5.8% this year, a sharp upwards revision from the December 2020 Economic Outlook projection of 4.2% for 2021. It also sees that the euro area is projected to grow by 4.3%in 2021 and 4.4% in 2022. At the same time, the United States real GDP is projected to grow by 6.9% in 2021 and 3.6% in 2022.
Macros:
Looking at the data side, overnight German data grabs the attention. Germany’s CPI accelerates to 2.5% YoY in May from 2.0% in April; this is their highest year-on-year rate since 2008. As a result, real yields slumped -2.67%, which’s an all-time low.
GfK Consumer Climate Study Germany for May 2021 pointed to -7.0 points in consumer confidence for June 2021, up 1.6 points from May this year.
Looking ahead, we will see flash CPI and German unemployment readings for may on Tuesday. Besides, the US jobs report for May will drive the EURUSD pair in the week ahead.
TECHNICAL OVERVIEW
The higher low and the higher high patter still evident on the 4-hour chart but failed to handle the 1.2250 last week. We expect that by the end of this week, EURUSD indeed comes out of the range of 1.2130-1.2250.
On the 4-hour chart, EURUSD continues to for a series of higher bottoms and higher tops, indicating sustained strength. But we should see a sustainable move above 1.2250 levels to forecast a momentum towards 1.2300 and 1.2350. In case of a weekly close above 1.2350 would open the door towards 1.2460 in the coming days. Traders may need to see how the ISM surveys and ADP National Employment Report data play out before chasing a move in EURUSD.
Flipside, 1.2130, and 1.1980 are the support to hold.
Levels to watch:
It is important to always keep in mind the risks involved in trading with leveraged instruments.
What is your Technical View?
Do you have a different idea? Please leave us a comment and get an answer from our professional analysts